Is anyone listening?

The design of the infrastructure fund model appears to be gradually evolving to meet investor needs. But this does not mean the industry can rest on its laurels. Chris Glynn caught up with two infrastructure professionals for their insights into the GP/LP dialogue

Brian Clarke was to be a panelist at the Infrastructure Investor: Americas 2011 conference, then he was not going to shy away from saying what, in his view, needed to be said. 

It was 1 pm, warm for December in New York, and the assembled audience in the Flatotel business suite was left in no doubt that, in Clarke’s view, general partners (GPs) bear a lot of responsibility for difficult dialogues with investors.

“You are not listening,” Clarke, executive director of business development for Australian-headquartered fund manager Industry Funds Management (IFM), charged.

The average limited partner (LP) has become “increasingly frustrated” with not being heard and with not being charged “an appropriate fee basis”. And there was more…but the important thing now, said Clarke, is that the average LP will no longer accept it.

His co-panelist, Brian Chase of placement agent Campbell Lutyens, took a more tacit approach. From time to time, he made it a point to disagree with Clarke, but did concede he found common ground with the man alongside him.

With the 1.30pm scheduled break in proceedings approaching, Clarke admitted: “I know. No one is going to be buying me a lunch.”

Unusual admision

Speaking after the session, Chase made an unusual admission: he is not a golfer. In fact, he has no real interest in the sport.

But golf – well, to be accurate, an indifference to golf – is how Chase wound up with a career in infrastructure fund placement.

He was standing on a golf course in Mexico while working on a resort development deal – his first deal as a project finance lawyer – and golf and the law were on his mind.

Reflecting on this, he offers the phrase “errant golf ball liability”. It turns out that if a golfer is hit by a ball while on a course, then that golfer can sue. Chase can name people who went into this line of practice.

Of course, “real estate was another area” for a project finance lawyer. But the third area, the one he found most interesting, was related to infrastructure.

“Water, wastewater, transportation – to and from the resort,” says Chase, as he reels off a list of necessary infrastructure surrounding these kinds of leisure developments.

Today, Chase is senior vice president at Campbell Lutyens in New York, a London-based adviser and fund placement agent for private equity and infrastructure firms. He has worked for the World Bank, consulting on infrastructure, as well as at The Carlyle Group as a vice president, and with law firm Nossaman. He is still not fascinated by golf, but has viewed with great interest the evolution of infrastructure fund formation.

However, he muses that, “looking back, it was inevitable”.

Bad design

Back in 2005, Brian Clarke was feeling frustrated.

He had himself been an investor, first as chief investment officer of a college endowment, then with a hedge fund. Now, Clarke was working for Macquarie Group, the infrastructure stalwart based in Australia.

Clarke was not feeling frustrated because he disliked his company. The opposite was true – Macquarie was widely seen as a global brand with market heft and a top-shelf product line. Plus, he was getting exposure to a new asset class. As an endowment manager, Clarke had had only indirect exposure to infrastructure, and his old hedge fund company was heavy on trading.

What frustrated Clarke was how the mainstream infrastructure fund was designed.

“All of us copied and pasted the structure and term of the private equity model,” Clarke says. “It was tried and tested, it was well accepted, so sure, do it”. In 2005, Chase was working with The Carlyle Group, the politically connected, Washington, D.C., private equity firm, as a vice president in its infrastructure group.

“The vintage infrastructure fund, circa 2005, had that closed-end, two-and-twenty, private equity-like structure,” Chase agrees.

The result, according to Clarke, was that the balance of power rested with the investment manager which controlled the capital and was looking to secure a robust fee-based revenue stream.

“The investor had to accept it, because there was really no other choice,” Clarke recalls.

Infrastructure as an asset class, and the people who invest in infrastructure, Clarke thought, deserved to be treated differently.

“Infrastructure is not solely about social enterprise,” he stresses. “Infrastructure is a quasi-social asset, providing a service to a community that, without which, that community cannot survive. Not only that, but an infrastructure asset is monopolistic in nature – often, the asset is the only provider of that service for that community.”

More sophisticated

Chase points to the global financial crisis as a turning point for the closed-end infrastructure fund model. Fundraising began to get harder, and due diligence became more rigorous.

“I think it would have happened anyway,” Clarke deadpans.

Regardless of the root cause, what happened was the emphasis on the closed-end model began to lessen, and a different, open-ended structure – what Chase dubs v.2.0 – was emerging. Both manager and investor were getting more sophisticated. (“Thank goodness,” Clarke says).

Both Chase and Clarke agree that investors were pushing for a controlled fee structure and wanted to gain an understanding of the risk-reward profile as well as the value-add of the manager. They were also demanding a consistent investment thesis – meaning that the manager could not shift between core and opportunistic.

In addition, investor demand – with particular regard to core infrastructure – was for access to returns of 7 percent to 12 percent, with liquidity and a long lifespan – all of which can be found in the open-ended model.

Chase thinks the closed-ended model is still applicable to energy infrastructure, however. He is a close follower of the space and expresses his enthusiasm for renewable energy infrastructure, such as that relating to shale.

“The closed-end debate is more relevant with energy,” Chase says.

Adjusting to demand

“I think that people are listening,” Clarke is ready to concede. “They are just not reacting.”

Clarke is quick to credit his former company, Macquarie, with adjusting to investor demand. “It has dramatically changed,” he says. “You can see it in the way Macquarie has changed”.
Both Chase and Clarke also point to a telling trend in infrastructure investing – the emergence of the pension fund as a direct investor.

Canada’s Caisse de dépôt et placement du Québec and Australia’s Queensland Investment Corporation from Australia are just two examples of those that have invested directly in infrastructure.

In September, Canada’s Alberta Investment Management Corporation (AIMCo) bought 50 percent of SAESA Group.

To Clarke, the direct investment phenomenon is further evidence that core infrastructure is a long-term holding.

“A GP cannot hold that asset for a 14-year period,” says Clarke. Clarke says he is pleased that IFM is “investor-owned”. The firm is backed by 32 superannuation funds, and Clarke is bent on building that investor base in the US. Hence, he is on the road a lot. “You have to see people face-to-face,” he says. 

That, he believes, is the best way to build a productive dialogue.